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- How do changes in interest rates impact consumer spending, business investment, and overall economic activity, and how does the central bank use interest rates as a tool of monetary policy? A) Changes in interest rates have no effect on economic activity. B) Lower interest rates typically encourage consumer borrowing and business investment, stimulating economic activity. The central bank uses interest rate adjustments as a tool to influence borrowing and spending. C) Higher interest rates boost economic activity by increasing consumer savings. D) Changes in interest rates only affect government spending.Monetary policy as one of the macroeconomic policies is generally implemented in line with the cycle of economic activity (business cycle). Based on this, answer the following questions: a) Explain what monetary policy is appropriate to apply when there is a decline in GDP, economic growth slows and there is a decline in the prices of goods? b) Explain what monetary policy is appropriate to apply when there is an increase in the amount of real output or economic growth and an increase in the price of goods? Explain!Describe a situation where a central bank would want to implement expansionary monetary policy. Describe a situation where a central bank would want to implement contractionary monetary policy. Suggest a policy tool that the central bank (e.g., the Federal Reserve) can use for one of the above situations and explain how that policy would alleviate the situation.
- A monetary policy that reduces the amount of money and loans in the economy is a contractionary monetary policy or a “tight” monetary policy. A monetary policy that expands the quantity of money and loans is known as an expansionary monetary policy or a “loose” monetary policy. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand. Conversely, a loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins. Note:- Do not provide handwritten solution. Maintain…Which of the following is true for monetary policy? Select one: a. As a contractionary monetary policy, the Bank of Canada can increase the target for the overnight rate. b. As an expansionary monetary policy, the central bank can buy bonds from the public to reduce a inflationary gap. c. The central bank can sell bonds during an economic downturn in order to stabilize the economy. d. The central bank can use open market operations to change the target for the overnight rate.After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag). According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers…
- a) Identify the four major tools of monetary policy. b) How can monetary policy address the problem of inflation?If the U.S. economy enters a new financial crisis, the government may use monetary policy tools to avert a financial meltdown. The government may utilize monetary policy tools to avert a financial collapse if the U.S. economy experiences another financial crisis. First, the Federal Reserve should operate as a lender of last resort and make loans to banks and financial institutions to meet their short-term obligations. When the risk of a financial collapse has receded, the government should revert to its traditional expansionary monetary policy. Open market activities of buying and selling assets on the open market is one action the government may use. Through open market operations, the government may increase the economy's liquidity by purchasing assets from banks and the general public. Reducing the discount rate, i.e. the interest rate at which the central bank provides short-term loans to banks, will result in a decrease in the rate at which commercial banks offer loans to the…Suppose that the Bank of Canada determines that the Canadian economy is currently overproducing. What can the Central Bank do to slow down economic activity? a. The Central bank can pursue an expansionary monetary policy by increasing the money supply, causing a decrease in the interest rate. As a result, real GDP will increase and the price level will increase. b. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing a decrease in the interest rate. As a result, real GDP will decrease and the price level will decrease c. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will decrease. d. The Central bank can pursue a contractionary monetary policy by decreasing the money supply, causing an increase in the interest rate. As a result, real GDP will decrease and the price level will increase e. The…
- When a Central Bank takes action to decrease the money supply and increase the interest rate, it is following: a) a quantitative easing policy. b) a expansionary monetary policy. c) a contractionary monetary policy. d) a loose monetary policy.What is the main argument for having a Central Bank independent from the government for the purposes of monetary policy? Select one: a. An independent Central Bank would have more resources available to devote towards implementing monetary policy b. An independent Central Bank would be more knowledgeable about the state of the economy. Consequently, the Central Bank would be better suited to implementing monetary policy c. The Central Bank is more credible in its inflation and cash rate targets. Consequently, inflation expectations will adjust appropriately to monetary policy announcements d. Having an independent Central Bank prevents any economic trade-offs when making monetary policy choicesWhich of the following is NOT an example of monetary policy to restrict aggregate demand? a)Raising interest rates b)Reducing money supply c)Rationing credit d)Increasing income tax
